In a Clash of the Titan Fund, Seventh Circuit Reminds Litigants that the FAA Permits Only Limited Judicial Review of Arbitrator Misjudgment

The Seventh Circuit Court of Appeals upheld an arbitration award where lack of evidence was the sole basis for challenging the award, explaining that the Federal Arbitration Act instead limits judicial review to improper arbitrator conduct enumerated in the FAA or violative of the parties’ agreement.

In Wise v. Wachovia Securities, LLC, No. 05-2640, 2006 WL 1541429 (7th Cir. June 7, 2006), the Wises were customers of Winters, a Merrill Lynch investment adviser. When Winters left Merrill Lynch for Wachovia, the Wises opened an account with Wachovia and agreed to arbitrate any dispute arising from their dealings with the firm.

In March 2000, Winters recommended that the Wises invest in the Titan Fund, telling them that he had invested $2 million of his own money in the fund. Shortly thereafter, the Wises closed their account at Wachovia and wired the balance to the Titan Fund. Winters left Wachovia the day preceding the wire transfer.

Months later, the Wises discovered that the Titan Fund was a sham and that their entire investment was lost. They claimed that Wachovia was liable for Winters’ fraud. During arbitration, Wachovia moved for summary judgment without submitting any evidence, and the arbitrators granted the motion without explanation.

On appeal, the Wises argued that the award must be vacated because “there was not even an atom of evidence to support summary judgment for Wachovia.” After reciting the grounds for vacating an award under the Federal Arbitration Act (FAA), the Court concluded that the absence of evidence did not trigger any of those grounds.

Noting the Seventh Circuit’s narrow definition of “manifest disregard of the law,” the Court explained: “It is tempting to think that courts are engaged in judicial review of arbitration awards under the [FAA], but they are not. When parties agree to arbitrate their disputes they opt out of the court system, and when one of them challenges the resulting arbitration award he perforce does so not on the ground that the arbitrators made a mistake but that they violated the agreement to arbitrate, as by corruption, evident partiality, exceeding their powers, etc. – conduct to which the parties did not consent when they included an arbitration clause in their contract.”

Despite its conclusion that lack of evidence “does not fit [the law’s] narrow conception of ‘manifest disregard,’” the Court left room for future cases by observing that “if this were really a no-evidence case, there might be some basis for inferring the presence of one or more of the statutory grounds.” Moreover, the Court outlined reasoning that would have justified the arbitrators’ grant of summary judgment. Specifically, the Court noted that “[t]he Wises’ relationship was with Winters rather than with Wachovia.”